For the first time in ten years, I was filing my own federal tax return on paper. I entered all the numbers into TurboTax and then figured out where to put all the numbers on the paper form. I owed the federal government $452 in taxes on my unemployment benefits. I wasn’t going to pay $150 to file through TurboTax. My tax situation is somewhat complicated by the business side of being a writer. If I didn’t have that, I would’ve followed the same steps that I did with Dad’s tax returns. Fortunately, state owed me $338. With Dad helping out with half the rent and covering my newest car repair bill for a replacement ignition switch and battery, I was able to pay off the tax. I filed my state return for free using CalFile.
Doing my own taxes made me appreciate the small business angle that I haven’t considered before. I’ve been writing in red for the last five years from buying all those red pens to revise my work. I haven’t started making money until now and I’m hoping to break even this year. After struggling to fill out my own tax return, I took some steps to avoid repeating this awful annual ritual.
First, breaking down the numbers on a quarterly basis. Shoving all the receipts into an envelope all year long is the easy part. Figuring out how to break down the numbers at tax time is very time consuming. Doing that every three months will make putting the final numbers together a snap. I also did my first profit and loss statement. I haven’t done one of those since I took business courses in college. I’m updating that every two weeks to keep tabs on my income and expenses. Ideally, income goes up and expenses come down.
Second, I started filing estimated taxes for both federal and state. Technically, I’m not required to do so. This is a preventive measure on my part to avoid not paying enough tax when I file my return next year. If you start making some serious money as a writer, you want your tax bill to be current at all times. Since I’ve shown a loss on tax returns for five years with little income, I need to prove that I’m running a business. Only an honest small business would fork over money to the tax man.
Third, if I do reach the break even point and make more than $400 in profits, I will have to pay a 15% self-employment tax. At first, that made me mad. Looking into this deeper, this is half of what I would be paying in a regular job plus the employer contribution. This amount is then reduced in half as a personal deduction. Doesn’t make much sense but that’s how the tax law works.
I’m hoping that this year will be very profitable indeed—even if I do have to pay more in taxes.